Do devalued currencies help the Latin American private sector?

Author:Casanova, Lourdes
Position::MULTILATINAS
 
FREE EXCERPT

According to Latin Trade, the revenues of Latin America's Top 500 firms fell by almost 26 % in dollar terms in one year. This decline is higher for specific sectors such as oil and mining where revenues have shrunk by 35 %.

What are the immediate reasons for this deterioration? Most companies' results are linked to the economic health of their main market, usually their home market. In 2015, and for the fifth consecutive year, the region's economic performance continued to slump and a further 1 % contraction is expected for 2016.

Regional output has taken a hit from low commodity prices, and as the study points out, a major blow has come from currency devaluations. Last year, with respect to the American dollar, currencies dropped to their lowest levels in 22 years: the Brazilian real lost 29 % of its value, the Colombian peso 23 % and the Chilean and the Mexican pesos 12 % each. Since the US dollar is the standard by which we measure the performance of countries and companies, even if revenues grow in local (devalued) currencies, their performance in dollars diminishes.

As local governments and experts applaud the devaluing of the Latin currencies, which supposedly should encourage exports, local companies struggle to handle the uncertainty brought by the volatility of the peso or the real. Pemex, Mexico's biggest company and the second biggest in Latin America, is being squeezed by its dollar-denominated debt. In 2015, Pemex saw its net interest payments increase by more than $230 million just because of the dollar's surge against the peso.

The biggest Latin American company, Petrobras, and the most indebted company in emerging markets, has done much better out of sheer luck. The revaluation of the real has reduced its debt somewhat, but when the firm sold $5 billion in debt earlier this year, the rate it got was more than 8.5 %.

Unlike the Mexican peso, the Brazilian real has rallied this year and Petrobras's debt in local currency has become smaller. Still, the company holds $126 billion in debt and the Brazilian real's swings make it difficult to manage. At the...

To continue reading

FREE SIGN UP